Understand the proposed federal ruling
A proposed federal ruling that would have extended overtime pay to millions of U.S. workers — the Overtime Final Rule — was halted by a federal judge in Texas just days before its scheduled December 2016 implementation. Although employers are free to follow existing overtime regulations until a decision is reached, it pays to understand the impact the rule may have on your nonprofit should it one day be enacted.
Here's a summary.
What is the Overtime Final Rule?
Previously, the Fair Labor Standards Act ensured that workers who earned up to $23,660 per year would be paid time-and-a-half after 40 hours in any given week. Under the new ruling, that threshold would jump to $47,476 per year — slightly more than twice the previous amount. That means, for example, that an eligible employee who earns $40,000 annually would be entitled to time-and-a-half during any week in which he or she works more than 40 hours.
The minimum annual salary for highly compensated employees who meet the duties requirement — that is, whose work primarily involves executive, administrative or professional duties — would increase from $100,000 to $134,004. In addition, the ruling would allow employers to meet up to 10 percent of the salary basis requirement — a fixed salary that can't be reduced based on variations in the amount of work performed — with bonuses and incentive payments, including commissions.
And that's not all. The proposed ruling calls for automatic updates to these salary thresholds every three years.
Who would qualify for overtime pay under the new ruling?
There are two scenarios in which an employee may be covered by the Overtime Final Rule — the organization is deemed a covered enterprise or the employee's job duties are covered for other reasons.
Your nonprofit may be considered a covered enterprise based on annual revenue or organization type.
To be considered a covered enterprise based on revenue, your nonprofit must bring in revenue from sales or business in excess of $500,000 annually. The Department of Labor offers a handy contrast to determine whether your revenue is business-related or charitable: running a thrift store to generate revenue is a business while offering free clothing to the homeless is not. The employees in the former situation would be covered under the Overtime Final Rule as employees of a covered enterprise, while the employees in the latter may or may not be, depending on their specific job duties.
Some nonprofits are covered enterprises based on their organization type, including:
- Institutions primarily engaged in the care of older adults and people with disabilities who reside on the premises
- Schools for children who are mentally or physically disabled or gifted
- Federal, state and local governments
- Preschools, elementary and secondary schools
- Institutions of higher education
If your organization meets the revenue threshold or falls under the organization types listed above, your employees would be covered under the Overtime Final Rule.
Specific job duties
Even if your organization isn't a covered enterprise, employees who engage in interstate commerce and have a salary below the $47,476 threshold would still be covered under the Overtime Final Rule. The U.S. Department of Labor interprets interstate commerce broadly. Your employees need not travel out of state to engage in interstate commerce. Simply processing shipments to or from other states, or regularly communicating with vendors or clients in other states, is enough.
What are some strategies for working with the new ruling?
Should it be implemented, your response to the Overtime Final Rule will depend a great deal on your organization's size and number of employees.
If your employees are already correctly classified as exempt based on salary or duties, you're in the clear. Similarly, if your nonexempt employees routinely work no more than 40 hours a week, the new ruling won't have any impact. If, however, you have nonexempt employees who earn less than the threshold amount who also routinely work overtime, you'll want to consider your options carefully — even before the ruling is implemented.
Compensation may be handled in quite a range of ways under the Overtime Final Rule. The Department of Labor offers a few scenarios:
- Everyone on your payroll already meets the exemption criteria and compensation continues as normal
- Some employees currently earn less than $47,476 and you raise their salaries to meet the exemption criteria and avoid paying overtime
- You continue to pay nonexempt employees at their current rate (whether hourly or salaried) and prepare to pay them overtime when they work more than 40 hours
- You continue to pay nonexempt employees at their current rate and restrict them from working overtime
- You redistribute and/or consolidate job duties to minimize overtime by any individual employee
- You convert a salaried position that regularly works overtime to an hourly one and pay the overtime hours (as long as the specific job duties are eligible for the nonexempt classification)
- Some combination of any of the above
An opportunity for better management
As you consider the best approach to wages and overtime for your nonprofit in light of the new compensation landscape, you might:
- Conduct an audit of all positions, including job duties, salaries and regularity of overtime
- Compare your organization's compensation with peer institutions to get a sense of how changes in compensation will affect employee morale
- Use the new ruling to prompt improved documentation on all positions in your organization
- Consider changes in workflow resulting from increased documentation of hours, including training on proper use of time sheets
Of course, the Overtime Final Rule will be a more challenging adjustment in states that didn't previously have strong rules about minimum wage and overtime. Organizations in states with strong laws to protect employees working overtime, such as California, will be impacted less. Going forward, you may choose to define future jobs at your organization based on the new ruling.
This article draws on the expertise of Grace Davies, a Minneapolis-based attorney with special interest in product liability, medical malpractice and employment discrimination.
National Council of Nonprofits: Breaking down your nonprofit's obligation to pay overtime under the new federal rules
U.S. Department of Labor: Guidance for non-profit organizations on paying overtime under the Fair Labor Standards Act (2016)
U.S. Department of Labor: Overtime Final Rule and the non-profit sector (2016)